Stock of the Day - January 6, 2009

Should you be shouting Yahoo!?

Are you feeling lucky? This is the main question you should ask yourself if you’re considering purchasing shares in Yahoo (YHOO).  I think the entire basis for success of this stock (in the short-term) is completely event driven.  Investors of Yahoo are looking for a merger with Microsoft that might come close to doubling the stock price. But hope for a merger is the only hope that you should have for this company.

My outlook for the company, merger aside, is grim for several reasons: (1) Major leadership problems, (2) Rapidly diminishing income, and (3) Basic lack of innovative products.

(1)Yahoo is in the middle of a search for a new CEO. The company isn’t going to fix its many problems until it has a new leader and the search for a new CEO may not end until the end of the first quarter, or longer. The company has been inefficient and unproductive for the past four years, and the lack of leadership is the core of the problem.

(2) If you want more scary news just take a look at Yahoo’s income statement (which, ironically, you can conveniently locate by going to their own finance website). Yahoo generated $1.1 billion in income in 2005, $941 million in ’06, and $695 million in ’07. Their quarterly numbers for ’08 have continued this steady downward trend. On the bright side, though, the company is sitting on $3.2 billion in cash.

(3) The lack of income can be attributed to a lack of innovation. Yahoo has been doing the same thing for a long time… and it’s boring. Google is absolutely dominating Yahoo in terms of search usage (64.1% of online searches compared to Yahoo’s 16.1%). Arguably the website’s most useful function, Yahoo Finance has tools that are very useful and widely implemented. The website needs something new and interesting to renew the interest of internet surfers and bring them back to Yahoo and away from Google.

The economic crisis we’re facing has been no help for the technology sector, and this does not exclude Yahoo.  Retailers are hurting badly and have less money to spend on advertising. This converts to smaller revenues for internet search companies that require advertising for the vast majority of their income.

But even knowing all this, Yahoo might still be a profitable purchase right now… if Microsoft decides to buy it out. So, we need to figure out if they actually will make the merger, and when it will happen. Back in January of 2008, Microsoft offered Yahoo $31 a share when the stock was trading at around $19. After about 3 months of negotiations, Microsoft pulled its offer off the table. Rumors of the deal happening have been circulating around ever since.

So, pardon me while I hop into the ring of speculation. I don’t think there is any way we’ll see a bid from Microsoft until Yahoo puts a new CEO in charge.  I’d put the odds of the deal between the two companies happening at 4 to 1.  If it happens, I believe it will happen in the second quarter of 2009 (when I think the new CEO will step in), but by then it is anyone’s guess at what price Yahoo shares will be trading at. Even still, you could collect some cash if you’re willing to make a bet on the deal going through. So again, I ask you: Are you feeling lucky?

That’s all I’ve got for now, and besides, I’m late for my Gambler’s Anonymous meeting.

 

-Matt Schwartz

College Trillionaire